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Starting A Retirement Plan? SIMPLE

Do you want to set up a retirement plan for your small business? Although you have several options, one popular choice is, by name and definition, simple. It's called the Savings Incentive Match Plan for Employees—or SIMPLE.

A SIMPLE plan provides a tax-advantaged way for employees, including the owner of a business, to save for retirement. It can reduce tax liability while attracting and retaining top-notch workers. And the plan is inexpensive to start up and operate, especially when compared to some other kinds of retirement plans.

To qualify to launch a SIMPLE plan, you must meet two requirements:

1. Your business can't have more than 100 employees.

2. The company can't operate another tax-qualified retirement plan.

If your business is eligible, it's easy to get started. All you have to do is contact your financial advisor or go directly to a financial institution offering SIMPLE plans. Most employers opt for a type of SIMPLE that uses individual retirement accounts (IRAs) for its employees. Anyone who earned at least $5,000 in each of the prior two years generally will be eligible to participate.

With a SIMPLE-IRA, contributions are deposited into employees' personal IRAs, then invested according to those workers' instructions. Typically, a plan will offer a selection of mutual funds. Funds in employees' IRAs can grow on a tax-deferred basis.

The amount of employee contributions is capped by IRS rules. For 2016, the limit is $12,500, plus a catch-up contribution of $3,000 for anyone age 50 or over. (These figures are indexed annually for inflation.)

But that's not the end of the story. Your company could sweeten the deal by adding matching contributions, much as in a 401(k) plan. You can use one of the following methods for these company contributions:

  • A non-elective contribution to the accounts of eligible employees equal to 2% of their salary, based on a maximum of $265,000 in compensation for 2016. For this option, the money goes even to employees who don't make their own contributions.
  • A dollar-for-dollar match of up to 3% of compensation of participating employees who have elected to make their own contributions.

You can set up your SIMPLE-IRAs for a calendar year as late as October 1 of that year. Also, unlike most other tax-qualified plans, SIMPLE-IRA plans don't have to file annual financial reports with the government.


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This article was written by a professional financial journalist for Amherst Financial Services and is not intended as legal or investment advice.

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